Accelerated Depreciation
Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset. Accelerated depreciation methods, such as double-declining balance (DDB), means there will be higher depreciation expenses in the first few years and lower expenses as the asset ages. This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset.
Definition: Accelerated depreciation is a method of depreciation used for accounting or tax purposes that allows higher depreciation expenses in the earlier years of an asset's life. Common accelerated depreciation methods include the Double Declining Balance (DDB) method and the Sum-of-the-Years-Digits (SYD) method. These methods differ from the straight-line depreciation method, which spreads the cost evenly over the asset's entire life.
Origin: The concept of accelerated depreciation originated in the early 20th century, as the industrial revolution increased the need for businesses to quickly recover investment costs. The United States first introduced accelerated depreciation methods in the 1954 tax reform to encourage business investment and equipment renewal.
Categories and Characteristics:
- Double Declining Balance (DDB): This method provides higher depreciation expenses in the early years of an asset's life. The formula is: Annual Depreciation = 2 × Straight-Line Depreciation Rate × Beginning Book Value.
- Sum-of-the-Years-Digits (SYD): This method allocates depreciation expenses based on the sum of the asset's useful life years. The formula is: Annual Depreciation = (Remaining Useful Life / Sum of the Years' Digits) × (Cost - Salvage Value).
Specific Cases:
- Case 1: A company purchases a machine worth $100,000 with an expected useful life of 5 years and a salvage value of $10,000. Using the Double Declining Balance method, the first year's depreciation expense is: 2 × (1/5) × $100,000 = $40,000.
- Case 2: The same machine, using the Sum-of-the-Years-Digits method, with the sum of the years' digits being 1+2+3+4+5=15. The first year's depreciation expense is: (5/15) × ($100,000 - $10,000) = $30,000.
Common Questions:
- Why choose accelerated depreciation over straight-line depreciation? Accelerated depreciation allows for faster cost recovery in the early years of an asset's life, reducing initial tax burdens.
- Will accelerated depreciation affect a company's financial statements? Yes, accelerated depreciation will increase depreciation expenses in the early years, reducing net income, but will decrease depreciation expenses in later years, increasing net income.
